In a Sector Watch Report we shared earlier this year titled “Shifts in Consumer Behavior and Their Impact on Logistics & Retail Space”, we offered a hypothesis: If one wanted to understand how the distribution and logistics sectors may evolve as a result of the pandemic, one should look no further than Asia (and China specifically) as a potential outcome or model. In China, e-commerce and mobile-commerce has long represented a substantial share of retail activity and transactions. As a result of the strong growth of e-commerce in China, its bulk distribution and last-mile infrastructure had to follow pace. And as we have noted previously, when the pandemic made its way through China, the demand for e-commerce fulfillment only grew larger and the supply chain once again followed suit (one could even argue that the growth in e-commerce was only made possible because of the well-established distribution infrastructure already in place!). As the US suffered through its first wave of the pandemic, there was a similar and immediate shift in consumer behavior from in-store shopping to e-commerce. And while there continues to be a gap between the two markets as it relates to e-commerce transactions as a share of total retail sales, the pandemic may have narrowed it, or at least nudged the US consumer to adopt an accelerated e-commerce footing.
So what does this all mean for the retail sector of the real estate industry in the US?
Well, one approach would be to again apply what we have seen in China in the past 10 years, and use it as a model for a potential outcome in the US, like we did in our previous Sector Watch. In fact, there is evidence to suggest the growth in the logistics and distribution sectors in the US is well underway (even before the pandemic); all to support the explosive growth in e-commerce. For example, in a Globe St. article titled “E-Commerce Driving Industrial Growth Even Faster Due to Pandemic” we learn:
- e-commerce penetration in the US spiked to more than 25% in April, up from 15% at year-end 2019
- Online retail was growing rapidly even before the coronavirus outbreak, as was e-commerce logistics operations. Prologis’ study of 30 top US retailers showed a 9% expansion of logistics operations footprints last year, compared with annual growth of 6-7% during the previous five years.
- Retailers are driving about 40% of the overall demand for logistics real estate.
So, should we expect continued growth in the logistics sector? Perhaps. But, keep in mind that all of this means there are large amounts of capital looking to acquire or build logistics space across the US (and do not forget the extraordinarily low interest rates and availability of debt capital), which can lead to even higher price competition and lower yields.
What does this potentially mean for retail space?
Building on what we have previously shared with you, we would once again like to use post-pandemic observations in the Chinese retail market as a potential barometer of things to come in the US. This time we think the best approach would be to unpack some observations of the World Economic Forum, in a piece it published named “4 new shopping trends revealed in post-lockdown China”
In this fascinating piece we found some new patterns in Chinese consumer behavior in what they are purchasing and how; all data points that could have implications on the state of retail space (not just warehouse space) over the short- and long-term. We learned four interesting data points to explore as part of our investment strategy. And we want to share the following with you:
- The pandemic nudged more Chinese consumers to shift from in-store to an online experience, and this was especially the case when it came to groceries. As noted in the piece: “On the first day of the 618 Grand Promotion, JD Super, JD’s online supermarket, saw its sales increase by 100% while online sales of fresh groceries rose by 140%, compared with the same promotional day last year.” We are already seeing signs of this happening in the US, and look no further than an article by Winsight which indicated Instacart experienced a 500% growth in order volume year over year. What this means for the retail sector in the US is not entirely certain, but this could suggest that while foot traffic in the neighborhood grocer might decline in the US, sales volume (per square foot or per store) may not be as negatively affected as once thought; but rather, neighborhood grocer space may be evolving from retail center to distribution center.
- This data point is fascinating. There has been a shift in behavior of younger shoppers in China. As outlined in the piece “Data indicates that since the beginning of this year, more than 70% of consumers born after 1995 have shifted from ‘buying only for themselves’ to ‘buying necessities for the whole family’.” It goes on to state, “According to data from JD Super, young people have moved into the kitchen; purchases of kitchen paper towels by young people, for example, has doubled compared with the same period last year. Awareness of the need to protect the family has also strengthened; the data shows a 34-fold increase in transaction volumes of disposable cleaning products and a 340% increase in purchases of sterilization products year-on-year…when many young people returned from major cities to their homes in China’s lower-tier cities, they helped their family members to engage with online shopping – and to some extent they have driven the penetration of brand, quality and authentic products into lower-tier city markets.” We wonder if perhaps a similar outcome in the US will play out, where younger consumers will not only drive online shopping for their primary household, but for secondary ones as well; the ones in which they may have older relatives that need help in navigating the online experience.
- Another hypothesis is that livestream shopping is no longer novel and will now play an increasingly important aspect of the shopping experience. In the US, one may expect a decline in foot traffic into stores and shopping centers (non grocery), but perhaps live streaming will become the same supplemental alternative as it has in China. Outside of the obvious connections it fosters between brands and consumers, an interesting social element emerged in China, enabled entirely by live streaming platforms. As the article points out “On the local business side, livestream and social channels are playing an important role in supporting direct sales for farmers and local factories who have been hit hard by the pandemic. Consumers feel inclined to support them, and are also benefited by these new shopping formats. Under a community group-buying initiative on JD platform, consumers bought over 225 tons of agricultural produce from Wuhan – the first epicentre of COVID-19 – in less than two months.” Again, it is difficult to understand the immediate impact on the retail real estate sector if this happens in the US, but livestreaming could be a driving force in the retail experience and influence the need for traditional retail space in the long term for certain goods. Furthermore, the “social good” aspect might influence buying decisions not formally available to socially conscious shoppers, or at least provide a way to shop virtually.
- Lastly, there are some interesting shifts in what consumers are buying in China, as part of the “new normal” and have us wondering about the implications in the US. For example, China has seen an increase in items for the home such as exercise equipment, mattresses, smart mirrors, and heated towel racks. Is this a sign of things to come for home improvement and home decor stores in the US? Another example (because of mandated mask-wearing), China saw a decline in lipstick and facial maintenance sales, but an overall increase in the proportion of eye-related make up sales in the category. Does this suggest we look at the share of revenue these products hold when assessing a US-based department store’s or pharmacy’s long-term prospects? It is all rather interesting.
Again, it is difficult and nonsensical to predict the future (and we never will), but we can apply what we know from past experience and observe other models as potential outcomes or drivers of change. While the consumer and e-commerce markets in China and the US continue to evolve on different tracks and speeds, the two will converge, so comparative analysis is part of our calculus. As we evaluate both markets and try to uncover opportunity in both regions, it is always important to understand underlying fundamentals and drivers of supply and demand; and it is equally important to use all data points available to build a comprehensive set of assumptions when shaping an investment strategy..
As always, thank you for your time and we hope this post finds you and your loved ones happy and well. If you are interested in staying connected, please be sure to follow us on social media or visit our website at eastalliace.us
The EastAlliance Family